South Korea CPI y/y fell to 0.0% which is the lowest print on record since 1966 highlighting mounting deflationary pressures from weakening demand and over capacity. This is not a good sign. If we are not getting any positive news on the US-China trade war and the USD continues to strengthen then equity markets will find it difficult to stage an upward move. The stronger USD is killing growth on top of the supply chain disruptions for the trade war.
DAX breakout: weaker EUR or green shoots trade?
The upside breakout in DAX futures (FDXc1) that started Friday seems to be losing steam in today’s session as risk-off is dominating across markets. The news out of Asia has not helped markets and it seems the US and China have difficulties finding the date for their next trade negotiation. In other words, the US-China trade war will continue to add volatility and, on the balance, negative dynamics for markets.
DAX futures have pushed higher on the weaker EUR and yesterday there was a small hint of green shoots trade as Sweden’s PMI manufacturing figures surprised to the upside leaving room for a rebound in Germany manufacturing sector as the two countries have similar exposure profile to the global economy (heavy industry).
The next big event risk for DAX is the ECB meeting on September 12 where the market is pricing in action from the ECB with a potential restart of their QE programme. This leaves potential upside for the DAX on the table but some of it will be offset by expected FOMC rate cut on September 18. European banks are under pressure so any ECB action not taking banks into consideration will provide great opportunities to trade banking stocks.